Monday, February 20, 2017

Two Cheers For A Carbon Tax, But Don’t Expect It To Fix Everything

By all means, let’s have a carbon tax. It’s the best way to deal with global climate change. It would require Republicans and Democrats to compromise — a good thing — and would provide revenue for a government that desperately needs more revenue. Fine. But let’s not pretend that a carbon tax is a panacea for either climate change or too much debt.

With most Republicans — and some Democrats — hostile to any tax increase, a carbon tax remains a long shot. Still, the odds have shortened, because some respected Republican elders recently endorsed it. These include George P. Shultz, James A. Baker and Henry Paulson. All were treasury secretary and/or secretary of state in administrations from Richard Nixon to George W. Bush.

Under their proposal, the tax would initially be $40 for each emitted ton of carbon dioxide (CO2). This corresponds to about 36 cents on a gallon of gasoline and a 5 to 10 percent increase in retail electricity rates, says economist Marc Hafstead of Resources for the Future, a nonpartisan think tank. The tax would increase annually by the rate of price inflation, plus two percentage points. (If inflation were 2 percent, the tax would rise by 4 percent.)

Carbon dioxide represents about 80 percent of U.S. greenhouse gas emissions. The theory is that higher prices for fossil fuels (coal, oil, natural gas) would favor more efficient cars and appliances while also accelerating the switch of electricity utilities to wind and solar. Studies by Hafstead and others suggest that this sort of carbon tax could reduce U.S. emissions by 26 to 28 percent below 2005 levels. That’s the goal the United States accepted at the 2015 Paris climate change summit. The Republicans’ proposed carbon tax would also raise slightly more than $200 billion annually.

But none of this eliminates the main objection to a carbon tax — for most Americans, it’s all pain and no gain.

“It is inherently difficult to convince people to endure costs now for benefits that accrue to others 30 years hence,” writes Ted Halstead, head of the Climate Leadership Council, sponsor of the carbon-tax plan. “Even then, such ‘benefits’ will manifest in the form of the situation getting less worse, rather than an outright improvement.”

To overcome this objection, the Republican plan would rebate all the money raised by the carbon tax. There would be a flat quarterly “carbon dividend” — the poor would get the same as the rich — starting at about $2,000 annually for a family of four. As the tax rose, so would the “dividend.” The politics of a carbon tax would change, argues Halstead, because most Americans would receive “benefits in the here and now.”

What’s not to like? We can fight global warming and favor the middle class and poor. Actually, it’s not so simple.

A carbon tax is one of the last big revenue sources left for a government facing budget deficits of roughly $9 trillion over a decade. If the carbon tax goes entirely to “dividends,” deficit reduction will suffer. Or taxes on labor and business will have to rise. But if (say) half the carbon-tax revenue went toward deficit reduction, the dividend would be less politically appealing.

Regardless, the tax will probably have to increase substantially. Halstead cites studies concluding that the tax needs to go up to as much as $200 a ton (nearly $2 on a gallon of gasoline) if fundamental changes are to occur. In part, a carbon tax is bait and switch. It starts low but must rise sharply to be effective.

What matter for global warming are the concentrations of CO2 in the atmosphere. These will increase even if the rate of annual emissions declines. How well we do depends on how well others do. The United States may hit its emission target, and other countries may miss theirs. Indeed, most of the growth in global emissions occurs in China, India and other “emerging market” countries.

Fossil fuels now supply four-fifths of the world’s energy, a share that has dropped only slightly since 1990. To stabilize CO2 concentrations, we must essentially stop burning fossil fuels. How is this to happen? Supporters of a carbon tax hope that the market mechanism — higher prices for fossil fuels — will unleash a torrent of innovation: safer nuclear, less costly solar, better batteries. This is a leap of faith. Higher prices do not guarantee technological breakthroughs.

We should not ignore climate change but should acknowledge the limits of what we know and can do. We are seeing a political convergence around a carbon tax. Thoughtful Republicans — perhaps President Trump? — want to be rid of their do-nothing stigma on climate change. Thoughtful Democrats are tired of the political paralysis. As Ronald Reagan once said: “If not us, who? And if not now, when?”